Executive Summary / Key Takeaways

• The Toro Company, a diversified leader in outdoor environment solutions with a 110-year history, is strategically positioned in attractive professional markets like underground construction and golf, which are benefiting from strong, durable demand drivers like infrastructure spending and sustained golf participation.
• Despite facing macroeconomic headwinds impacting homeowner-facing businesses and managing elevated field inventories in certain segments, TTC is leveraging its market leadership, innovative product portfolio (including differentiated technology in alternative power, smart connected, and autonomous solutions), and best-in-class distribution channels.
• The company's multi-year AMP productivity initiative is delivering tangible cost savings ($70.5 million run-rate achieved by Q2 FY25 towards a $100 million FY27 target), which are expected to drive profitability improvement and fund future innovation, partially offsetting cost pressures and volume softness in some areas.
• Revised fiscal 2025 guidance anticipates total revenue flat to down 3%, with Professional segment growth offsetting Residential declines, and adjusted EPS in the range of $4.15 to $4.30, implying modest year-over-year growth at the midpoint, supported by expected margin expansion.
• Key factors for investors to monitor include the pace of field inventory normalization, the impact of macroeconomic conditions on homeowner spending, the realization of AMP savings, and the successful commercialization and adoption of new technology-driven products.

Setting the Scene: The Toro Company's Foundation

For over a century, The Toro Company has cultivated a legacy rooted in providing solutions for the outdoor environment. From its origins, TTC has evolved into a diversified enterprise serving a wide array of professional and residential customers across turf maintenance, landscaping, irrigation, snow and ice management, and underground construction. This long history, marked by resilience through numerous economic cycles, has shaped a portfolio strategically designed to address essential needs with regular replacement cycles. The company's overarching strategy centers on accelerating profitable growth, driving productivity and operational excellence, and empowering its people, underpinned by a commitment to helping customers enrich the beauty, productivity, and sustainability of the land.

A Legacy of Resilience and Strategic Evolution

TTC's journey reflects a continuous adaptation to market demands and technological advancements. The company boasts an impressive track record, including 15 consecutive years of top-line growth, a testament to its ability to consistently expand its reach and offerings. Key strategic moves, such as the acquisition of Charles Machine Works prior to 2018, significantly bolstered its presence in the underground construction sector, a market now identified as a major growth driver. More recently, portfolio adjustments like the divestiture of the Pope Products business and the acquisition of ProKASRO Services USA technology and distribution assets highlight a focus on refining the business mix for enhanced profitability and targeting high-potential niches within its core markets. These actions, combined with the strategic development of its distribution networks, including partnerships with major retailers like Lowe's (LOW) and Ace Hardware, underscore a proactive approach to market positioning and channel optimization.

The Core Business Segments: Professional and Residential

TTC operates through two primary reportable segments: Professional and Residential. The Professional segment, the company's primary growth and profit engine, encompasses a broad range of equipment and services for golf courses, landscape contractors, municipalities, and construction professionals. This segment benefits from strong brand loyalty and a predominantly U.S.-based manufacturing footprint, which offers strategic advantages in the current trade environment. The Residential segment serves homeowners with a variety of yard and snow products, distributed through mass retailers and dealers. While smaller, this segment provides market reach and brand visibility, though it is more susceptible to fluctuations in consumer confidence and discretionary spending.

Technological Edge: Driving Productivity and Differentiation

A cornerstone of TTC's strategy and a key competitive differentiator is its commitment to leveraging technology and innovation across its portfolio. The company is actively investing in and deploying solutions in alternative power, smart connected products, and autonomous systems, directly addressing critical customer needs like labor availability, resource conservation, and operational efficiency.

In the Professional segment, TTC's technology provides tangible benefits. The Hypercell power system, utilized in electric construction equipment like the E2500 Ultra Buggies and eDingo TX750, enables up to 8 hours of runtime, offering a quiet, zero-emission solution particularly valuable for indoor work. These machines are designed to work together on a job site to maximize efficiency. In snow and ice management, the BOSS ColdFront Technology electrical system and EVX Plus smart spreader offer smart integration, streamlining operations. For golf courses, TTC is at the forefront of robotic solutions with products like the Turf Pro autonomous mower (utilizing GPS RTK technology to mow up to 18.5 acres three times a week with minimal operator input), the Exmark Turf Tracer with XiQ, and the GeoLink Autonomous Fairway Mower. The Range Pro golf ball picking robot, also with GPS RTK, can collect over 15,000 balls in 24 hours, freeing up labor. Beyond robotics, smart connected solutions like the Intelli360 web-based toolkit and Lynx Drive platform offer real-time data and mobile control for turf and irrigation management. The partnership with TerraRad introduces Spatial Adjust software, integrating with Toro Lynx to provide data-driven soil moisture mapping and irrigation recommendations, aiming to optimize turf health while reducing water consumption and costs.

These technological advancements are not merely features; they translate into quantifiable benefits for customers, such as reduced labor costs, lower operating expenses (e.g., fuel/energy savings), improved resource efficiency (e.g., water conservation), and enhanced productivity. For investors, this technological leadership contributes to TTC's competitive moat, supports premium pricing, drives market share gains in specialized areas, and fuels long-term profitable growth by creating high-value solutions that are difficult for competitors to replicate quickly. The company's R&D focus on these areas is a strategic investment aimed at maintaining market leadership and expanding margin potential.

Competitive Arena: Positioning Against Rivals

The outdoor environment solutions market is competitive, with players ranging from large, diversified conglomerates to specialized niche providers. TTC faces direct competition from companies like Deere & Company (DE), Stanley Black & Decker (SWK), and Briggs & Stratton (BGG), among others.

Compared to Deere & Company, a giant in agricultural and construction equipment, TTC holds a strong position in specialized turf and golf markets. While DE has scale advantages and invests heavily in technology, TTC's deep expertise and market leadership in golf equipment and irrigation are distinct strengths. TTC's focus on integrated solutions for golf, being the only company offering both equipment and irrigation, provides a unique competitive advantage. In underground construction, TTC's comprehensive lineup and deep customer relationships are described as difficult to duplicate, positioning it favorably against broader construction equipment providers.

Against Stanley Black & Decker, which competes in residential and professional tools and outdoor equipment, TTC differentiates itself through a focus on professional-grade durability and performance, particularly in zero-turn mowers where its Exmark brand is preferred two-to-one by landscape professionals over the next best-selling brand. While SWK has a vast distribution network, TTC's strategic development of its independent dealer network and mass partnerships, like the successful Lowe's collaboration, strengthens its channel presence.

Briggs & Stratton, primarily an engine and power equipment specialist, competes with TTC in engines and certain power equipment categories. TTC's strength lies in its integrated product systems and innovation across the entire machine, rather than just components, allowing for optimized performance and efficiency that can command a premium over BGG's more cost-focused offerings.

TTC's competitive advantages are further bolstered by its best-in-class distribution channels, which foster strong customer loyalty and support for its products. While facing vulnerabilities related to weather dependency and exposure to macroeconomic sensitivity in homeowner markets, TTC's strategic focus on high-growth, less discretionary professional segments, coupled with its technological differentiation and productivity initiatives, positions it to navigate competitive pressures and maintain market share in its core areas. The company's tariff mitigation strategies, including a significantly reduced reliance on China supply since 2018 and leveraging its U.S. manufacturing base, are also cited as providing a competitive edge.

Recent Performance: Navigating Headwinds and Tailwinds

The first half of fiscal 2025 presented a mixed picture for TTC, reflecting the dynamic market environment. Consolidated net sales for the second quarter decreased by 2.3% to $1,317.9 million compared to the prior year, primarily due to lower shipments in the Residential segment and the impact of prior year divestitures. Year-to-date net sales were down 1.6% to $2,312.9 million for similar reasons, partially offset by higher Professional segment shipments and net price realization.

Gross margin saw a 50 basis point contraction in both the second quarter and year-to-date periods, moving to 33.1% and 33.4% respectively. This was primarily attributed to higher material and manufacturing costs and inventory valuation adjustments, partially mitigated by favorable product mix and productivity improvements. SG&A expense as a percentage of net sales increased slightly due to lower sales volume.

Despite the top-line and gross margin pressures, disciplined cost management and productivity gains helped support the bottom line. Reported net earnings for the second quarter were $136.8 million ($1.37 per diluted share), down from $144.8 million ($1.38 per diluted share) in the prior year. Year-to-date net earnings were $189.6 million ($1.88 per diluted share), down from $209.7 million ($2.00 per diluted share). However, adjusted net earnings, which exclude certain items like productivity initiative charges, showed resilience. Adjusted net earnings for Q2 were $141.8 million ($1.42 per diluted share), an increase from $147.3 million ($1.40 per diluted share) in Q2 FY24. Year-to-date adjusted net earnings were $207.7 million ($2.06 per diluted share), up from $213.8 million ($2.04 per diluted share). This adjusted growth highlights the underlying operational improvements despite revenue challenges.

Segment performance diverged. The Professional segment continued to demonstrate strength, with net sales increasing by 0.8% in Q2 and 1.2% year-to-date. Segment earnings grew by 6.0% in Q2 and 8.5% year-to-date, leading to margin expansion (19.9% in Q2, 18.5% YTD). This performance was driven by strong demand in golf and grounds and underground construction, favorable product mix, and productivity gains, partially offset by higher costs and lower shipments in some areas like compact utility loaders and underground due to specific factors like dealer divestitures and SKU rationalization.

The Residential segment faced significant headwinds, with net sales decreasing by 11.4% in Q2 and 10.0% year-to-date. This decline was primarily due to weak consumer confidence, high interest rates impacting homeowner spending, a late spring in many regions, lower shipments of walk power mowers, zero-turn mowers, and portable power products, and the impact of the Pope divestiture. Segment earnings saw a substantial decrease (down 55.4% in Q2, 44.1% YTD), resulting in margin contraction (5.4% in Q2, 6.4% YTD). This was largely driven by lower volume, higher costs, and inventory valuation adjustments, partially offset by productivity and lower promotions.

Inventory levels remain a key focus. Total inventory was up 1.3% year-over-year at the end of Q2 FY25, primarily due to higher finished goods balances, though sequentially down slightly from the end of FY24. Field inventory levels for lawn care and snow products remain elevated but are being actively managed down. Order backlog, while improving from previous highs, remains elevated for underground construction and golf and grounds products, reflecting sustained strong demand in these areas.

Financial Health and Capital Allocation

TTC maintains a solid financial position, providing flexibility to execute its strategy. As of May 2, 2025, the company had available liquidity of $899.4 million, comprising cash and cash equivalents of $176.5 million and $722.9 million available under its revolving credit facility. Management is confident that current liquidity and projected cash flows from operations are sufficient to meet anticipated needs for at least the next twelve months, including working capital, capital expenditures, debt service, dividends, and potential acquisitions.

Cash flow generation, while impacted by working capital fluctuations in the first half of FY25 (net cash from operations of $123.1 million YTD vs $135.1 million YOY), demonstrated strong performance in FY24 with a free cash flow conversion rate of 112% of reported net income. The company targets a gross debt-to-EBITDA leverage ratio of 1 to 2 times and holds investment-grade credit ratings, reflecting a prudent approach to managing its balance sheet.

Capital allocation priorities remain consistent: first, strategic investments in the business (organic growth, M&A); second, returning cash to shareholders; and third, maintaining leverage goals. The company plans approximately $100 million in capital expenditures in FY25 to support new products, advanced manufacturing, and capacity. TTC has a strong history of returning capital, recently increasing its quarterly cash dividend by 5.6% for Q2 FY25 and repurchasing $200 million of common stock in the first six months of FY25, with over 5.6 million shares remaining authorized for repurchase. The refinancing of debt facilities in FY24, including an increased revolving credit facility, provides additional capacity for growth initiatives.

Outlook and Guidance: Charting the Course Ahead

Based on its performance in the first half of fiscal 2025 and current market visibility, TTC has adjusted its full-year guidance to reflect the ongoing macroeconomic headwinds impacting homeowner-facing businesses.

For fiscal year 2025, the company now anticipates total net sales to be flat to down 3% compared to fiscal 2024. This revised outlook assumes continued strong demand and stable supply for businesses with elevated backlog (Underground Construction, Golf and Grounds), a continuation of macroeconomic caution affecting homeowners, and weather patterns aligned with historical averages for the remainder of the year. It also factors in the necessary adjustments to normalize field inventory levels for lawn care and snow products.

Segment-wise, the Professional segment is expected to see net sales increase slightly year-over-year, while the Residential segment is projected to experience a mid-teens decline in revenue.

Despite the revised sales outlook, management expects improvement in profitability. Adjusted gross margin and adjusted operating earnings as a percentage of net sales are anticipated to improve on a year-over-year basis for the full year. Professional segment earnings margin is expected to expand, while Residential segment earnings margin is projected to decline due to the economic headwinds faced by homeowners.

The revised adjusted diluted EPS guidance range for fiscal 2025 is $4.15 to $4.30. The midpoint of this range implies approximately 1% year-over-year growth, demonstrating the expected benefit from productivity gains and cost management offsetting the impact of lower sales volume in certain areas. Key assumptions supporting this outlook include interest expense of approximately $59 million and an adjusted effective tax rate of around 19%.

A significant driver of the expected profitability improvement is the Amplifying Maximum Productivity (AMP) initiative. As of the end of Q2 FY25, AMP has delivered cumulative cost savings of $30 million and achieved $70.5 million in anticipated annualized run-rate savings towards its target of over $100 million by fiscal 2027. These savings are expected to contribute to margin expansion and fund strategic investments. The company's "Amp It Up" initiative sets an internal goal of achieving a total company adjusted operating earnings margin of at least 14% by the end of fiscal 2026, further emphasizing the focus on profitability improvement.

Key Risks and Challenges

While TTC possesses significant strengths, several risks and challenges could impact its performance and the investment thesis. Macroeconomic conditions, particularly weak consumer confidence, high interest rates, and potential economic slowdowns, pose a significant risk to the Residential segment and homeowner-facing portions of the Professional segment, potentially leading to reduced demand, trade-downs, and delayed purchases.

Managing field inventory levels remains crucial. Although progress has been made in normalizing lawn care and snow product inventories, elevated levels could necessitate further production adjustments or increased promotional activity, impacting margins. Similarly, while elevated backlog in underground construction and golf is currently a tailwind, a sudden shift in demand or inability to fulfill orders efficiently could pose challenges.

Supply chain disruptions, inflationary pressures on material and manufacturing costs, and freight expenses continue to be potential headwinds, although the company is actively employing mitigation strategies like strategic sourcing, price adjustments, and productivity initiatives.

The dynamic tariff environment presents uncertainty, with potential for new or increased tariffs impacting costs. While TTC has taken steps to reduce exposure and plans to offset known tariffs, unforeseen changes could affect profitability.

Labor availability, a challenge for many of TTC's professional customers, could indirectly impact equipment demand if contractors are unable to take on more work. However, this also presents an opportunity for TTC's productivity-enhancing and autonomous solutions.

Finally, specific asset risks, such as the potential for impairment of the Spartan trade name intangible asset if the decline in customer demand for certain products continues, warrant monitoring, particularly given the narrowing gap between fair value and carrying value.

Conclusion

The Toro Company stands as a seasoned leader in the outdoor environment sector, leveraging its extensive history, diversified portfolio, and robust distribution networks to navigate a complex market. While facing near-term headwinds driven by macroeconomic caution impacting homeowner spending and necessitating inventory adjustments in certain segments, the company's core investment thesis remains compelling, anchored by the strength of its Professional segment businesses in high-demand markets like underground construction and golf.

TTC's strategic focus on innovation, particularly in alternative power, smart connected, and autonomous technologies, provides a crucial competitive edge, addressing key customer needs for productivity and efficiency and supporting long-term growth and margin potential. Coupled with the tangible benefits being realized from the AMP productivity initiative, the company is actively working to enhance profitability and operational resilience. Despite a revised, more cautious outlook for fiscal 2025 revenue, the expectation of adjusted EPS growth and margin improvement underscores management's confidence in its ability to execute and control costs in a challenging environment. Investors should weigh the company's proven ability to manage through cycles, its strategic positioning in attractive professional markets, and the potential for productivity gains and technological innovation to drive future value against the ongoing risks associated with consumer spending sensitivity and inventory management.